Pacific Drilling: Latest Quarterly Results Show Growth Potential

Pacific Drilling S.A. (NYSE:PACD) announced its first quarter earnings results on May 30, 2012. The company's financial numbers were significantly better than last year which was largely expected. The company also continued the recent trend among offshore drilling companies of showing optimism concerning the short- and medium-term business climate. Pacific Drilling's CEO, Chris Beckett, stated,

"During the early part of 2012, demand for ultra-deepwater drillships continued to strengthen, as demonstrated by the acceleration in multi-year inquiries and contract amounts with increasingly higher dayrates. We expect to see market demand exceed supply well into 2014. In this favorable market context, the Pacific Sharav received a letter of award from a major oil company for a long term commitment. We expect to provide more details on this commitment in the coming weeks. These positive market dynamics supported our decision to order a seventh drillship, scheduled for delivery in May 2014."

Pacific Drilling reported much better results than it did in the first quarter of 2011. Pacific Drilling earned $18.3 million on revenue of $117.4 million for the quarter. This works out to $0.08 per diluted share. This compares very favorably to the net loss of $10.1 million or $0.07 per diluted share that the company had during the prior year quarter. It is important to note that, at the time, Pacific Drilling was still involved in its joint venture with Transocean (NYSE:RIG). The results of this operation were included in Pacific Drilling's financial results. Including this brings the company's prior quarter results up to a net income of $9.1 million. This works out to $0.06 per diluted share. This number is the one that was published on the company's financial statements. Regardless of which number is used, the company performed significantly better during this quarter than it did during the prior year quarter.

Pacific Drilling is likely to deliver even better results next quarter. Two drillships, the Pacific Mistral and the Pacific Scirocco, started on their first assignments during the quarter. The Pacific Scirocco began operating in Nigeria and the Pacific Mistral began operating in Brazil. These two rigs are one reason why Pacific Drilling will show revenue and profit growth in the second quarter. Since both rigs began operations during the quarter, neither one was able to contribute the full amount of contract revenue that would be earned for operating for a full quarter. However, each rig will be operating for the entire second quarter and therefore each will generate significantly more revenue than in the first quarter. Due to the relatively small size of Pacific Drilling's fleet, two rigs will represent a substantial portion of the company's contract revenue and backlog. These two rigs operating for their first full quarter will thus have a proportionally higher impact on Pacific Drilling's revenues than what would be the case at a larger drilling company.

In several previous articles, I mentioned that the offshore drilling industry as a whole has been suffering from downtime due to issues with blowout preventers on rigs. Pacific Drilling is no exception to this. Three rigs suffered downtime during the quarter due to maintenance and upgrades to the blowout preventer. This resulted in the company having a revenue efficiency of 88.9% during the first quarter. Without including the downtime related to this, Pacific Drilling had a revenue efficiency of more than 93.9%. This provides further evidence that the company will likely enjoy higher revenues over the coming quarters. The downtime that was associated with repairing these issues with the blowout preventers shaved more than 5% off of the company's revenue efficiency for the quarter. The company has now fully upgraded all of its blowout preventers which should prevent this downtime from happening again. As a result, Pacific Drilling should see higher revenue efficiency next quarter because the company will not suffer downtime due to BOP work. Revenue efficiency is a way of expressing, as a percentage, how close a drilling company came to achieving its theoretical maximum amount of contract revenue. As such, a higher number means that the company came closer to achieving this theoretical maximum revenue. Therefore, if Pacific Drilling achieves a higher revenue efficiency next quarter then its contract revenues will be higher than in this quarter.

At the time of writing, Pacific Drilling trades for $7.94 per share. This would give the company a P/E of 24.81, calculated from annualizing the EPS from the first quarter. I am calculating the P/E in this way due to Pacific Drilling still being a relatively new company and previous quarters had large charges related to the company's start-up costs (among other one-time expenses). This does represent a price premium over its peers. This premium appears to reflect the company's growth prospects quite well, though. Zacks Investment Research predicts that Pacific Drilling will earn $0.57 per share this year. This would give the stock a forward P/E ratio of 13.93.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PACD over the next 72 hours.

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